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THE 


BANKING  SYSTEM 


UNITED  STATES 


ITS  RELATION  TO  THE    MONEY  AND    BUSINESS  OF 
THE  COUNTRY. 


CHARLES  G.  DAWES. 


1894: 

Rand,  McNally  &  Company 

CHICAGO. 


Copyright,  1894,  by  CHARLES  G.  DAWES. 


1)38 


PREFACE. 


The  exact  relations  of  our  banking  system 
to  the  business  prosperity  and  money  of  the 
United  States  do  not  seem  to  be  fully  com- 
prehended by  our  people. 

The  writer  is  a  business  man,  to  whom  his 
dealings  with  banks,  in  the  ordinary  course  of 
business,  has  suggested  the  preparation  of  this 
little  volume,  in  which  he  discusses  that  serv- 
ice of  banks  to  the  community  which  to  him 
seems  at  once  the  most  important,  and,  at  the 
same  time,  most  commonly  ignored.  In  his 
judgment  there  can  be  no  proper  understand- 
ing of  the  monetary  problems  of  the  day 
unless  the  relation  of  the  bank-credit  money 
of  the  country  to  the  money  of  the  Govern- 
ment is  fully  comprehended. 

Lincoln,  Neb.,  October  29,  1894. 


100059 


BANKING    SYSTEM    OF    THE 
UNITED    STATES. 


CHAPTER  I. 

THE   BANK  AND   THE   COMMUNITY. 

From  the  standpoint  from  which  we  shall 
consider  a  bank  in  its  relation  to  the  business 
community,  we  shall  not  treat  it  as  a  private 
corporation  organized  for  profit,  but  will  re- 
gard it  as  in  the  nature  of  a  public  corporation, 
its  officers  as  public  officers  serving  the  busi- 
ness community,  its  depositors,  whose  funds 
are  loaned  by  these  officers  to  the  community, 
as  demand  creditors  of  the  community,  and  its 
borrowers  as  debtors  of  the  depositors.  From 
this  standpoint  the  capital  of  a  bank  may  be 

(7) 


8         BANKING  SYSTEM   OF   UNITED   STATES. 

regarded  as  a  kind  of  indemnity  money,  depos- 
ited by  the  stockholders  of  the  bank  as  a  pledge 
that  the  depositors  in  the  community  shall  col- 
lect from  the  borrowers  in  the  community  "  on 
demand." 

As  to  the  profits  arising  to  the  banking  cor- 
poration from  this  species  of  trusteeship  for 
the  community,  they  are  smaller  than  those  of 
any  other  class  of  private  corporations  which 
deal  with  the  community  as  a  whole,  and 
which  perform  services  for  the  community 
which  can  be  compared  in  value  with  those 
performed  by  the  banks.  The  tax  upon  the 
community  rejpresented  by  these  profits  is  so 
small,  in  comparison  with  the  benefits  derived 
by  the  community  from  banks,  and  compared 
with  the  risks  incurred  by  banks  for  the  sake 
of  the  community,  that  it  is  not  worthy  of 
extended  consideration.  The  object  of  this 
little  volume  is  to  demonstrate  the  value  and 
the  vast  importance  of  banks  as  the  creators  of 
the  great  bulk  of  the  money  used  by  the  busi- 
ness community,  and  to  point  out  some  of  the 


THE  BANK  AND   THE   COMMUNITY.  9 

results  arising  out  of  the  relations  existing 
between  our  banking  system  and  the  business 
community,  which  are  often  overlooked.  Be- 
fore taking  these  matters  up  we  will  mention 
a  few  of  the  better  known  services  of  the  bank 
to  the  community. 

In  the  first  place,  a  bank  acts  as  an  agent 
for  the  active  and  enterprising  members  of  the 
community  who  borrow  money  for  the  sake  of 
carrying  on  the  productive  and  mercantile 
industries  upon  which  so  many  members  of 
every  community  depend  for  their  living.  It 
collects  a  multitude  of  small  amounts  from  the 
members  of  the  community,  which,  if  retained 
by  them,  would  be  idle  capital,  and,  under 
proper  restrictions,  places  the  money  in  the 
hands  of  those  who  put  it  to  its  best  use.  It 
acts  as  the  trustee  for  the  accumulating  and 
saving  portion  of  the  community,  affording 
them  the  opportunity  to  place  their  money 
where  it  is  safe,  and  where  at  any  time,  unless 
otherwise  contracted,  they  can  receive  it  on 
demand. 


lO       BANKING   SYSTEM   OF    UNITED    STATES. 

By  the  use  of  a  clearing-house  and  the 
check  system,  banks  enable  a  community  to 
carry  on  the  bulk  of  their  business  without  the 
risk  and  trouble  of  handling  actual  money  in 
large  sums.  In  returning  the  canceled  checks 
to  a  customer,  and  balancing  monthly  his  bank 
book,  they  furnish  him  with  vouchers  for  pay- 
ments made  by  him,  signed  by  the  party 
receiving  the  payments.  To  quite  a  portion  of 
the  community  they  act  as  bookkeepers,  and 
among  smaller  tradesmen,  and  some  larger 
ones,  unfortunately,  the  stubs  of  the  bank- 
check  book  form  their  most  reliable  accounts. 

They  become  trustees  in  a  multitude  of 
transfers  between  parties  residing  in  different 
places  where  papers  are  to  be  delivered  on 
receipt  of  cash  for  remittance.  They  furnish 
drafts  and  bills  of  exchange,  enabling  the 
members  of  a  community  to  cheaply  and 
safely  transfer  money  to  a  distance.  They 
furnish  information  to  business  men,  at  home 
and  at  a  distance,  as  to  the  reliability  of 
prospective  customers.     Their  favorable  intro- 


THE   BANK   AND   THE   COMMUNITY.  II 

ductions  facilitate  business  acquaintances.  As 
National  banks  they  add  to  the  circulating- 
medium  '^  National  Bank  Notes."  These  are 
some  of  the  services  performed  by  banks  for 
the  community.  But  we  are  yet  to  consider 
their  most  important  service. 


CHAPTER  11. 

THE  BANK-CREDIT   MONEY   OF  THE   UNITED 
STATES. 

According  to  the  report  of  the  Secretary 
of  the  Treasury  there  is  outstanding  money 
issued  by  the  United  States  Government  as 
follows : 


General 

stock  Coined 

or  Issued. 

In  Treasury. 

Amount   in 
Circulation 
Oct.  1,  1894. 

$579,728,587 

421,176,408 

75,054,481 

64,845,699 

339*676,504 
151,609,267 
346,681,016 
56,305,000 
207,564,458 

$79,602,339 

16,809,713 
55,260 
9*^55,785 
30,113.893 
79.397,535 
550,000 
5,017,748 

Standard  silver  dollars 

58,'244!768 

Gold  certificates       

64,790,439 

Treasury  notes  (1890) 

United  States  notes 

121,495,374 
267,283,481 

Currency  certificates  (1872)... 
National  bank  notes 

55,755,000 
202,546,710 

Totals 

$2,242,641,420 

$587,602,438 

$1,655,038,982 

At  the  present  time  all  of  the  money  of 
the  Government  circulates  at  par.  In  other 
words,  there  is  at  present  no  form  of  money 


(12) 


BANK-CREDIT   MONEY.  1 3 

at  a  discount.  Considered  from  the  stand- 
point of  intrinsic  value  alone,  tlie  gold  dollar 
is  of  course  the  most  valuable,  although  its 
value  as  money  is  no  more  than  that  of  the 
paper  or  silver  dollar.  There  seems  to  be, 
among  our  people,  some  confusion  in  ideas  as 
to  what  this  parity  in  the  purchasing  power  of 
these  different  forms  of  money  is  due.  Some 
possess  the  erroneous  idea  that  the  ''  stamp 
of  Government."  determines  the  matter,  and 
that  paper  to  which  the  ''  stamp  of  Govern- 
ment "  is  affixed,  becomes  ipso  facto  as  valu- 
able as  the  piece  of  gold  bearing  the  same 
stamp. 

It  is  well  to  fix  clearly  in  our  minds  the 
true  reason  why  there  is  no  disparity  in  the 
debt-paying  and  purchasing  power  of  the 
different  forms  of  Government  money. 

The  reason  that  every  silver  or  paper 
dollar,  issued  by  our  Government,  has  the 
buying  and  debt-paying  value  of  a  gold 
dollar,  is  because  it  has  been  declared  by  law 
to  be  the   established    policy   of  the   United 


14       BANKING   SYSTEM   OF   UNITED    STATES. 

^States  to  keep  the  metals,  silver  and  gold,  on 
a  parity,  and  because,  in  the  fulfillment  of 
this  policy,  the  Treasury  Department  of  the 
Government  holds  itself  in  readiness  to  re- 
deem, and  in  actual  practice  does  redeem,  in 
gold,  upon  demand,  other  forms  of  United 
States  money  in  circulation,  including  paper 
and  silver. 

The  amount  of  gold  which  has  been  held  in 
the  Treasury,  and  which  has  been  practically, 
though  perhaps  not  legally,  applicable  to  the 
redemption  of  its  other  forms  of  currency,  has 
not,  since  1882,  fallen  below  the  sum  of  $100,- 
000,000  until  within  the  last  two  years. 

Secretary  of  the  Treasury  Charles  Foster, 
in    his    annual   report^  on    the    state    of    the 


^  In  this  same  report  (1892)  Secretary  Foster  says 
further: 

"  But  if  $100,000,000  in  gold  was  a  suitable  or  necessary 
reserve  in  1882  and  in  1885,  it  would  seem  clear  that  a 
greater  reserve  is  necessary  now.  It  should  be  remembered 
that  since  1882  we  have  added  to  our  silver  circulation  the 
sum  of  $259,016,182  in  standard  silver  dollars  coined  under 
the  old  silver  act  of  1878.     These  dollars  are  nearly  all  out- 


BANK-CREDIT   MONEY.  1 5 

finances  of  the  United  States  for  the  fiscal 
year  ending  June  30,  1892,  says:  ''In  the 
bank  act  of    1882   Congress  gave   expression 


standing,  and  largely  represented  by  silver  certificates.  We 
have  also  increased  the  legal-tender  paper  circulation  by 
issuing  about  $120,000,000  of  the  Treasury  notes  authorized 
by  the  act  of  July  14,  1890,  and  to  this  we  are  adding  about 
four  millions  each  month  in  payment  of  silver  bullion 
purchased. 

"  It  is  true  that  silver  certificates  are  not  redeemable  in 
gold,  and  that  the  Treasury  notes  of  1890  are  redeemable 
in  coin;  but  since  it  has  been  declared  to  be  the  established 
policy  of  the  United  States  to  maintain  the  two  metals, 
silver  and  gold,  on  a  parity  with  each  other,  it  is  obvious 
that  this  large  addition  to  our  circulation  has  increased  the 
possible  charge  upon  our  gold  reserve.  In  view,  therefore, 
of  these  increased  and  increasing  liabilities,  the  reserve  in 
the  Treasury  for  the  redemption  of  the  Government  obliga- 
tions should,  in  my  opinion,  be  increased  to  the  extent  of  at 
least  20  per  cent  of  the  amount  of  Treasury  notes  issued, 
and  to  be  issued,  under  the  act  of  July  14,  1890." 

From  this  statement  of  Secretary  Foster,  and  from  the 
conduct  of  the  Treasury  Department  since  these  words  were 
w^ritten,  it  may  be  assumed  that  no  refusal  of  redemption 
of  other  forms  of  money  in  gold  would  be  made  where 
that  refusal  would  have  a  tendency  to  create  a  disparity  in 
the  value  of  the  different  moneys  issued  by  the  Government. 

As  a  matter  of  fact,  the  recent  large  demands  for 
redemption  in  gold  have  been  based  on  gold  certificates, 
United  States  notes,  and  Treasury  notes.     Yet,  to  all  prac- 


l6       BANKING   SYSTEM    OF   UNITED   STATES. 

to  its  belief  that  $100,000,000  in  gold  was  a 
suitable  reserve  by  providing  that,  whenever 
the  amount  of  gold  in  the  Treasury  should 


tical  purposes,  the  Government  is  daily  redeeming  silver 
certificates  and  silver  dollars  in  gold,  as  is  admirably- 
explained  by  Professor  J.  Lawrence  Laughlin  of  Chicago 
in  the  following  words: 

"It  may,  perhaps,  be  asked  why  the  silver  dollars  of 
412^  grains,  being  worth  intrinsically  only 'from  86  to  89 
cents,  do  not  depreciate  to  that  value.  The  Government 
buys  the  silver,  owns  the  coin,  and  holds  all  that  it  can 
not  induce  the  public  to  receive  voluntarily;  so  that  but 
a  part  of  the  total  coinage  is  out  of  the  Treasury.  And 
most  of  the  coins  issued  are  returned  for  deposit  and  silver 
certificates  received  in  return.  There  being  no  free  coin- 
age, and  no  greater  amount  in  circulation  than  satisfies  the 
demand  for  change,  instead  of  small  bills,  the  dollar-pieces 
will  circulate  at  their  full  value,  on  the  principle  of  sub- 
sidiary coin,  even  though  over-valued,  and  the  silver  cer- 
tificates practically  go  through  a  process  of  constant 
redemption  by  being  received  for  customs  dues  equally 
with  gold.  When  they  become  too  great  in  quantity  to  be 
needed  for  such  purposes,  then  we  may  look  for  the  depre- 
ciation with  good  reason." 

Professor  Laughlin,  having  written  these  words  in  18S4, 
would  probably  readily  agree  that  if  the  policy  of  the 
Treasury  Department,  as  stated  by  Secretary  Foster,  is 
maintained,  which,  among  other  things,  regards  silver  cer- 
tificates as  a  possible  charge  on  the  gold  reserve,  we  need 
never  look  for  any  depreciation  of  silver  certificates,  not- 


% 


BANK-CREDIT  MONEY.  1 7 

fall  below  that  sum,  the  issue  of  gold  certifi- 
cates should  cease.  In  1885  the  then  Secretary 
of  the  Treasury  adopted  the  practice  of  report- 
ing $100,000,000  of  the  gold  in  the  Treasury 
as  a  'reserve  for  the  redemption  of  United 
States  notes,'  and  recently  the  majority  of  the 
Judiciary  Committee  of  the  present  House  of 
Representatives  expressed  the  opinion  that, 
under  existing  law,  the  maintenance  of  this 
reserve  is  obligatory."  Since  Secretary  Foster 
wrote  these  words,  however,  the  United 
States  Treasury,  in  following  the  declared 
policy  of  keeping  the  metals  on  a  parity,  has 
used  the  gold  in  the  Treasury  to  redeem  not 
only  the  "  United  States  Notes  "  above  referred 
to,  but  Treasury  notes  of  1890,  which  are  "  pay- 
able in  coin,"  and  are  based  on  a  deposit  of 
uncoined    silver    bullion.      In    so    doing,  the 


withstanding  a  possible  over-supply  of  silver  dollars  and 
certificates  as  regards  customs  payments,  or  the  demand  for 
subsidiary  money.  We  might,  however,  under  such  circum- 
stances, expect  the  necessity  of  replenishing  the  Treasury 
gold  supply. 
2 


1 8       BANKING   SYSTEM   OF   UNITED    STATES. 

Treasury  Department  has  very  largely  en- 
croaclied  upon  what  was  called  the  "  $100,000,- 
000  gold  reserve."  Notwithstanding  the  fact 
that  a  $50,000,000  issue  of  5  per  cent  United 
States  bonds  was  sold  by  the  Secretary  of 
the  Treasury  within  the  last  year  for  the 
purpose  of  strengthening  the  gold  reserve, 
that  reserve  has  shrunk,  under  demands  for 
redemption  of  other  forms  of  money,  to  the 
present  sum  of  about  $60,000,000. 

There  is  a  strong  analogy  between  the 
United  States  and  the  relation  of  its  currency 
obligations  to  its  gold  reserve  and  a  bank 
and  the  relation  of  its  deposits  to  its  cavsh 
resources.  The  Government  assumes,  in  regard 
to  the  demands  for  redemption  of  other  forms 
of  money  in  gold,  what  the  bank  assumes  in  re- 
gard to  the  demand  for  the  redemption  of  its 
deposits  in  cash  —  that  the  actual  demand  for 
redemption  will  never  be  but  a  small  fraction 
of  the  possible  demand. 

When  a  bank  continues  to  cash  checks  over 
its  counter,  and  thus  stands  ready  to  redeem 


BANK-CREDIT    MONEY.  1 9 

its  deposits  in  cash,  then  all  its  deposits  are 
considered  good  by  the  community,  and  checks 
drawn  against  them  circulate  on  a  par  with 
all  other  kinds  of  money.  When  a  bank  re- 
fuses to  cash  properly  drawn  checks  over  its 
counter,  and  thus  refuses  to  redeem  its  de- 
posits in  cash,  then  the  value  of  all  its  deposits 
is  lessened  in  purchasing  power,  and  checks 
never  circulate  against  them  except  at  a  dis- 
count, and  generally  not  at  all.  Thus,  as  long 
as  the  United  States  Treasurer  stands  ready 
to  cash  Treasury  notes,  or  United  States  notes, 
or  silver  certificates  in  gold,  over  his  counters 
on  demand,  so  long  will  all  the  money  of  the 
United  States  circulate  on  a  par  with  gold, 
and  be  as  good  as  gold.  When,  however,  the 
United  States  refuses  this  redemption,  and 
by  its  own  act  discriminates  between  its  dif- 
ferent forms  of  money,  then  will  the  forms 
of  money,  other  than  gold  and  gold  certifi- 
cates, become  discredited  and  depreciated  in 
value,  as  compared  with  gold,  and  gold  money 
will  go  out  of  active  circulation. 


20       BANKING   SYSTEM    OF   UNITED   STATES. 

In  carrying  out  its  policy  to  keep  every  one 
of  its  dollars  as  good  as  a  gold  dollar,  by  readi- 
ness to  redeem  other  forms  of  currency  in  gold 
on  demand,  this  Government  is  at  present  hold- 
ing, on  a  par  with  gold,  if  we  include  National 
bank  notes,  over  $1,000,000,000  of  paper  and 
silver  money  which  has,  therefore,  equal  pur- 
chasing and  debt-paying  power  with  gold.  It 
was  in  pursuance  of  this  policy  that  Congress 
repealed  the  Sherman  law  under  which  the 
''Treasury  notes  of  1890"  were  issued,  and 
which  was  adding  about  $4,000,000  per  month 
of  Treasury  notes  to  the  already  large  amount 
of  other  money  held  at  par  by  the  dwindling 
gold  reserve. 

We  have  gone  somewhat  into  detail  in 
speaking  of  the  money  issued  by  the  United 
States  Government  for  reasons  which  will  ap- 
pear hereafter.  Yet  this  $1,600,000,000  of 
money  does  not  constitute  all  of  the  money 
which  is  used  by  the  people  of  the  United 
States.  In  fact,  it  is  by  far  the  smallest 
part   of  the   total   money  which   they   use   in 


I 


BANK-CREDIT   MONEY.  21 

the  daily  transaction  of  their  enormous  busi- 
ness. 

According  to  the  report  of  the  Comptroller 
of  the  United  States  Treasury  for  1881,  the  re- 
ceipts of  the  New  York  banks,  on  two  different 
days,  consisted  of  98  7-10  per  cent  in  checks 
and  drafts,  and  only  i  3-10  per  cent  of  actual 
cash.  The  ratio  in  the  United  States  is  given 
at  94  6-10  per  cent  of  checks  and  drafts  to 
5  4-10  per  cent  of  actual  money.  In  a  later 
report  of  the  Comptroller  (1890)  the  proportion 
in  New  York  of  checks,  drafts,  and  bills  of 
exchange  to  actual  cash  received  was  stated, 
on  two  different  dates,  to  be  96  4-100  per  cent 
and  95  64-100  per  cent,  and  in  the  United 
States  at  92  5-10  per  cent  and  91  4-100  per  cent. 
In  his  report  for  1893  (page  24)  the  Comptroller 
speaks  of  cash  transactions  as  amounting  to 
only  8  7-10  per  cent  of  the  total  money  trans- 
actions of  the  country.  Indeed,  all  authorities 
agree  that,  on  the  average,  over  90  per  cent  of 
the  total  business  transactions  of  the  citizens 
of  the  United  States,  involving  payments  of 


22       BANKING  SYSTEM    OF    UNITED    STATES. 

money,  are  carried  on  with  checks  and  drafts. 
The  $1,600,000,000  of  Government  money  is 
actually  handled  in  business  to  an  amount  less 
than  10  per  cent  of  the  total  amount  of  money 
involved  in  business  transactions. 

As  checks  and  drafts  are  always  drawn 
against  deposits,  the  relation  of  bank  deposits 
to  the  money  used  by  the  people  of  the 
country  is  seen  at  once  to  be  very  important. 

In  the  report  of  the  Comptroller  of  the 
Treasury  of  the  United  States  for  1893,  the 
individual  deposits  of  the  State  banks,  loan 
and  trust  companies,  savings  banks,  and  pri- 
vate banks  of  the  United  States  are  given  as 
$3,070,462,680,  and  the  individual  deposits  of 
the  National  banks  of  the  United  vStates  as 
$1,465,446,904  (October  3,  1893).  In  these  fig- 
ures are  not  included  the  deposits  classed  in 
bank  statements  under  the  head,  "  Due  to 
National  Banks"  and  ''Due  to  State  Banks." 

Thus  we  see  that  the  people  of  the  United 
States,  irrespective  of  whatever  actual  cash 
they  may  have   on   hand,  have  a   purchasing 


BANK-CREDIT   MONEY.  23 

ability,  expressed  in  deposits  in  solvent  banks 
and  trust  companies,  amounting-  to  $4,535,909,- 
584,  or  a  sum  nearly  three  times  as  great  as 
the  total  $1,600,000,000  cash  which  the  United 
States  Government  has  placed  in  circulation. 
The  greater  part  of  this  sum  is  either  subject 
to  check  or  issued  as  negotiable  demand  cer- 
tificates. While  deposits  expressed  in  time 
certificates  and  in  savings  bank  balances  are 
not  generally  devoted  to  purchases  by  our 
people,  except  under  emergency,  nevertheless 
they  are  regarded  as,  and  under  ordinary 
conditions  are,  in  practice,  a  cash  asset  in  the 
hands  of  any  man  in  relation  to  their  power 
to  pay  debts  or  purchase  commodities.  If 
we  are  to  comprehend  the  monetary  situa- 
tion and  money  supply  in  this  country,  and 
its  relation  to  the  rise  and  fall  in  prices, 
and  the  prosperity  or  depression  of  our  busi- 
ness interests,  we  must  fix  firmly  in  our 
minds  this  great  truth :  that  since  bank-credit 
currency  (to-wit,  checks  and  drafts  drawn 
against    bank    deposit    balances)   is    accepted 


24       BANKING   SYSTEM   OF   UNITED   STATES. 

on  a  par  with.  United  States  currency  or 
coin  in  payment  of  a  debt,  or  of  the  pur- 
chase price  of  a  commodity,  therefore  the  sup- 
ply of  money  in  the  country  regulating  prices 
can  not  be  considered  as  United  States  coin 
and  currency  alone,  but  must  be  considered  as 
including  the  total  sum  of  bank  credits  which, 
in  relation  to  a  commodity  or  debt,  has  the 
same  buying  and  debt-paying  power  as  the 
actual  money  of  the  Government.^ 

'We  must  be  careful,  in  considering  the  effect  upon 
prices  of  commodities,  not  to  confuse  the  aggregate  of  bank 
deposits  and  the  aggregate  circulation,  at  a  given  time,  of 
checks  and  drafts  based  upon  deposits.  It  is  the  latter 
which  must  be  considered.  An  increase  in  bank  deposits, 
in  itself,  would  make  no  difference  in  prices,  if  no  checks 
used  in  the  purchase  of  commodities  be  drawn  against  such 
deposits, 

John  Stuart  Mill  says:  "  Money  left  with  a  banker,  and 
not  drawn  against,  or  drawn  against  for  other  purposes  than 
buying  commodities,  has  no  effect  on  prices,  any  more  than 
credit  which  is  not  used.  Credit  which  z's  used  to  purchase 
commodities  affects  prices  in  the  same  manner  as  money. 
Money  and  credit  are  thus  exactly  on  a  par  in  their  effect 
on  prices." 

The  variation  in  the  total  amount  of  bank  clearings  in 
the  United  States  is  a  very  much  better  index  of  the  varia- 


BANK-CREDIT   MONEY.  25 

Many  of  those  who  assume  to  discuss  finan- 
cial questions  —  particularly  the  silver  ques- 
tion —  refuse  to  consider  bank-credit  currency 
as  related  to  prices,  or  to  the  purchasing  or 
debt-paying  power  of  a  dollar,  saying  "that 
behind  every  check  there  must  be  the  money 
in  the  bank."  The  shallowness  of  such  state- 
ments is  apparent  in  the  light  of  the  fact  that 
to  pay  off  in  cash  the  deposits  of  National, 
State,  and  savings  banks,  and  trust  companies 
in  the  United  States,  there  would  be  required 
nearly  three  times  the  amount  of  the  entire 


tion  in  prices  than  the  variation  in  the  aggregate  amount  of 
bank  deposits.  This  results  from  the  fact  that  clearings,  to 
a  certain  extent,  are  the  measure  of  the  bank-credit  money 
in  actual  use  in  carrying  on  the  business  of  the  country, 
while  the  aggregate  bank  deposits  are  the  measure  simply 
of  the  purchasing  power  which  may  be  devoted  to  the  trans- 
action of  business,  but  of  which  a  large  portion  may  be 
absolutely  idle,  and,  therefore,  not  a  factor  in  the  establish- 
ment of  current  prices. 

While  the  aggregate  of  bank  deposits  after  a  panic  may 
soon  reach  the  maximum  existing  before  the  panic,  it  is 
uniformly  the  case  that  a  very  much  longer  period  of  time 
is  necessary  to  restore  aggregate  clearings  of  banks  to  the 
old  point. 


26       BANKING   SYSTEM    OF   UNITED    STATES. 

gold,  silver,  and  paper  money  of  the  United 
States  Government  now  in  circulation.  The 
business  of  this  country,  if  done  through  the 
same  hands  as  at  present  in  cash  alone,  without 
the  use  of  bank-credit  money,  would  demand,  in 
the  one  city  of  New  York,  the  presence,  every 
three  weeks,  of  all  of  the  $i,6oo,o(x>,ooo  money 
issued  by  the  United  States  Government. 

How  it  should  happen  that  the  people  of 
the  United  States  have  deposited  in  banks 
and  trust  companies  nearly  three  times  the 
entire  cash  circulation  in  the  United  States 
—  in  other  words,  how  bank-credit  money  is 
created  —  we  will  consider  in  our  next  chapter. 
It  is  in  giving  to  the  country  the  greatest  pro- 
portion of  the  money  needed  to  carry  on  its 
business  that  banks  render  that  service  which 
is  of  the  most  vital  importance.^ 


^  Prof.  F.  W.  Taussig,  in  the  course  of  a  very  able 
treatise  upon  the  "  Silver  Situation  in  the  United  States" 
(see  Vol.  7  (1892),  Publications  of  the  American  Economic 
Association,  pages  63-64),  refers  to  bank-credit  currency 
in  the  following  language :  "  The  true  way  to  state  the  con- 


BANK-CREDIT   MONEY.  2/ 

ditions  on  which,  in  our  day,  the  general  range  of  prices 
depends,  is  to  compare  the  quantity  of  commodities  offered 
for  sale  with  the  total  volume  of  purchasmg  power  in 
terms  of  money.  In  this  volume  of  purchasing  power  the 
largest  item  consists,  in  our  day,  not  of  actual  money,  but  of 
credit  in  various  forms. 

"In  countries  like  England  and  the  United  States  it 
consists  chiefly  in  the  form  of  credit  applied  by  deposit  banks 
—  bank  deposits  and  bank  checks.  That  bank  deposits  and 
checks  are  the  means  of  payment  in  all  large  transactions, 
and  in  many  small  ones;  that  the  exchanges  carried  on 
through  them  are  greater  than  those  carried  on  with  any 
other  form  of  currency;  that  they  are  completed,  through 
the  machinery  of  clearing-houses,  with  the  use  of  an  insig- 
nificant amount  of  coin  or  notes  —  these  are  facts  familiar 
enough.  Indeed,  the  effects  of  credit  as  a  substitute  for 
money  may  have  been  explained  in  economic  text-books  so 
fully  that  they  may  be  assumed  to  be  well  understood;  it  is 
the  extent  rather  than  the  nature  of  the  effects  that  needs 
to  be  insisted  upon.  At  any  one  time,  and  for  considerable 
lengths  of  time,  the  general  range  of  prices,  w4th  a  given 
volume  of  transactions,  depends  not  on  the  quantity  of 
money  simply,  but  on  the  volume  of  credit  used  as  purchas- 
ing power;  and  of  this  volume  of  credit  the  chief  item  in 
countries  like  England  and  the  United  States  is  bank  cur- 
rency in  the  form  of  deposits  and  checks.  In  such  a  state 
of  things  the  increase  of  other  forces  of  currency  can  have, 
in  itself,  only  a  minor  effect." 

W.  Stanley  Jevons,  in  his  w^ork  entitled  "Money  and 
the  Mechanism  of  Exchange,"  quotes  from  Prof.  Cliffe 
Leslie's  article  in  the  Fortfiightly  Review  for  November, 
1870,  as  follows:  "The  improvements  in  locomotion  and 
in  commercial  activity,  which  have  so  largely  augmented  the 


28       BANKING   SYSTEM   OF   UNITED    STATES. 

money-making  power  of  the  Germans,  have  also  quickened 
prodigiously  the  circulation  of  money;  and  the  develop- 
ment of  credit,  likewise  following  industrial  progress,  has 
added  to  the  volume  of  the  circulating  medium  a  mass  of 
substitutes  for  money,  which  move  with  greater  velocity. 
A  much  smaller  amount  of  money  than  formerly  now  suf- 
fices to  do  a  given  amount  of  business  or  to  raise  prices  to  a 
given  range ;  and  to  the  increased  amount  of  actual  money 
now  current  in  Germany  we  must  add  a  brisk  circulation 
of  instruments  of  credit.  Were  the  circulating  medium 
composed  of  coin  alone,  whatever  the  amount  of  the 
precious  metals  issuing  from  the  mines,  or  circulating  in 
other  countries,  and  whatever  the  price  of  German  com- 
modities in  market  abroad,  no  rise  in  the  prices  of  German 
commodities  at  home  could  take  place  without  additional 
coin  to  sustain  it," 

John  Stuart  Mill,  in  his  "  Principles  of  Political  Econ- 
omy," says:  "  In  a  state  of  commerce  in  which  much  credit 
is  habitually  given,  general  prices  at  any  moment  depend 
much  more  upon  the  state  of  credit  than  upon  the  quantity 
of  money.  For  credit,  though  it  is  not  productive  power, 
is  purchasing  power;  and  a  person  who,  having  credit, 
avails  himself  of  it  in  the  purchase  of  goods,  creates  just  as 
much  demand  for  the  goods,  and  tends  quite  as  much  to 
raise  their  price,  as  if  he  made  an  equal  amount  of  pur- 
chases with  ready  money. " 


CHAPTER  III. 

HOW   BANK-CREDIT   MONEY   IS   CREATED. 

Every  National  bank  in  the  country  is 
presumed,  by  law,  to  be  on  a  conservative 
and  safe  basis,  so  far  as  its  ability  to  redeem 
deposits  is  concerned,  when  it  has  on  hand 
in  cash,  and  on  deposit  w^ith  approved  banks, 
called  reserve  agents,  25  per  cent  of  the 
amount  of  its  total  deposits. 

In  cities  of  small  population,  a  less  pro- 
portion of  cash  and  cash  resources  to  total 
deposits  is  legally  deemed  consistent  with 
conservative  banking.  When  the  cash  and 
reserve  accounts  (called  together  ''cash  re- 
sources ")  exceed  to  any  extent  the  25  per 
cent  limit,  the  bank,  according  to  the  gener- 
ally accepted  rule,  can  safely  loan  the  excess. 
In  the  determination  of  its  ability  to  loan, 
(29) 


30       BANKING   SYSTEM   OF   UNITED   STATES. 

a  bank  does  not  ordinarily  consider  the  rela- 
tion of  the  amount  of  cash,  in  the  vaults  to 
the  amount  of  its  credits  with  reserve  agents, 
for  the  reason  that  in  usual  practice  the 
reserve  agent  will  ship  cash  when  called  for, 
or  the  bank  can  sell  for  cash,  to  neighboring 
banks,  exchange  drawn  against  its  balance 
with  the  reserve  agent.  It  is  the  relation 
of  the  sum  of  the  cash  and  reserve  balances 
to  deposits  which  determines  whether  or  not 
the  bank  is  in  a  condition  to  loan.  While 
this  is  a  well-known  fact,  the  consequences 
of   it   are   often   overlooked. 

The  fact  that  National  and  other  banks 
are  allowed  to  loan  on  the  strength  of  their 
deposits  in  other  banks,  as  well  as  on  account 
of  cash  actually  in  their  vaults,  means  that, 
considering  banks  as  a  whole,  the  actual  cash 
held  by  them,  into  which  checks  and  drafts 
are  by  their  terms  and  by  practice  concur- 
rently convertible,  is  much  less  than  25 
per  cent  of  the  deposits.  This  fact,  together 
with    the     fact    that    one    bank    will    credit, 


HOW   BANK-CREDIT   MONEY   IS   CREATED.     3 1 

as  a  deposit  redeemable  in  cash,  a  check  on 
another  bank,  means  also  that  our  banks  add 
to  the  purchasing  power  of  the  community, 
or,  in  other  words,  create  money  for  the  com- 
munity. In  giving  the  following  illustrations 
of  those  operations  of  banks  which  result 
in  an  increase  of  purchasing  power  to  the 
community,  we  do  not  wish  our  readers  to 
infer  that,  under  similar  circumstances,  all 
banks  would  act  as  do  the  banks  which  we 
assume  as  existing  for  purposes  of  illustration. 
Yet  whether  it  be  the  policy  of  a  bank  to  run 
with  a  25  per  cent  reserve,  as  do  the  banks  in 
our  illustrations,  or  a  40  per  cent  reserve,  the 
general  effects  of  loaning  operations  are  the 
same. 

The  instances  we  will  give  clearly  demon- 
strate the  enormous  influence  of  banks  upon 
the  money  supply  or  purchasing  power  of  a 
community. 

We  will  suppose  a  National  bank  to  be 
organized  at  Chicago  with  $600,000  capital,  all 
of  which,  at  the  commencement  of  business,  is 


32       BANKING   SYSTEM    OF   UNITED    STATES. 

in  the  vaults  in  cash.  ^'  Let  us  assume  that  the 
first  action  of  the  Chicago  bank  is  to  deposit 
$300,000  of  its  capital  in  the  New  York  bank 
which  has  been  approved  by  the  Comptroller 
of  the  Treasury  of  the  United  States  as  its 
reserve  agent,  the  latter  bank  having  already 
on  hand  25  per  cent  of  its  deposits,  in  cash 
and  cash  resources,  at  the  time  the  deposit  of 
$300,000  is  made  by  the  Chicago  bank. 

The  statement  of  the  Chicago  bank  then 
stands  as  follows: 

ASSETS.  LIABILITIES. 

Due    from   approved  re-  Capital  stock  $600,000 

serve  agents $300,000 

Cash  in  vaults 300,000 


$600,000  $600,000 

We  will  assume  that  during  the  next  week 
the  Chicago  bank  receives  $800,000  in  deposits 
and  makes  $1,000,000  of  loans,  retaining  50  per 
cent  of  its  deposits  in  cash  resources.  The 
statement  of  the  Chicago  bank  then  stands  as 
follows : 


HOW   BANK-CREDIT   MONEY   IS   CREATED.     33 

ASSETS.  LIABILITIES. 

Loans  and  discounts. .$  1,000,000       Capital  stock $  600,000 

Due  from  approved  re-  Deposits 800,000 

serve  agents  in  New 

York 300,000 

Cash  in  vaults 100,000 


$1,400,000  $1,400,000 

We  will  assume  that  of  the  $300,000  deposit 
made  by  the  Chicago  bank,  the  New  York 
bank  loans  $225,000,  reserving  $75,000  in  order 
to  still  keep  its  cash  reserve  25  per  cent  of 
its  deposits.  We  can  now  trace  the  increase 
in  the  purchasing  power  of  the  country- 
involved  in  these  transactions,  or,  in  other 
words,  ascertain  the  increase  in  bank-credit 
money. 

It  is  as  follows : 

I  St.  An  increase  in  New  York  of  $225,000 
purchasing  power,  loaned  by  the  New  York 
bank  to  borrowers  there,  since  but  $75,000  of 
the  $300,000  deposited  by  the  Chicago  bank 
is  retained  by  the  New  York  bank  to  protect 
itself  on  the  Chicago  deposit,  and  since  at 
Chicago  this  $300,000  New  York  balance  does 


34       BANKING   SYSTEM   OF   UNITED   STATES. 

the  work  of  an  equal  amount  of  'cash  in 
assisting  to  hold  good,  under  ordinary  busi- 
ness conditions,  the  $800,000  deposits  of  the 
Chicago  bank. 

2d.  An  increase  of  $400,000  purchasing 
power,  or  bank-credit  money  at  Chicago. 
This  increase  has  been  created  in  this  way  : 
In  making  $1,000,000  loans,  the  Chicago  bank, 
in  addition  to  loaning  to  its  customers  its 
capital  of  $600,000,  thus  returning  to  the  com- 
munity all  the  purchasing  power  it  possessed 
before  the  organization  of  the  bank,  has  also 
loaned  to  them  $400,000  of  the  $800,000 
placed  in  the  bank  by  depositors,  thus  adding 
$400,000  to  the  purchasing  power  of  the  bor- 
rowers. And  yet,  by  this  latter  transaction,  no 
purchasing  power  has  been  taken  away  from 
the  depositors,  since  checks  drawn  against  their 
$800,000  deposits  are  accepted  in  payments  on 
a  par  with  the  gold,  silver,  and  paper  money 
of  the  Government,  the  bank  having  pledged 
itself  to  redeem  them  in  cash  on  demand. 
Thus  we  see  that  this  Chicago  bank,  so  con- 


HOW   BANK-CREDIT   MONEY   IS   CREATED.     35 

servative  as  to  hold  in  cash  and  reserve  agents 
one-half  its  total  deposits,  has  yet,  by  these 
simple  transactions,  increased  the  supply  of 
money  which  can  be  devoted  to  the  purchase  of 
commodities,  or  the  payment  of  debts,  in  the 
sum  of  $400,000  at  Chicago  and  $225,000  at 
New  York  —  a  total  of  $625,000,  being  a  sum 
$25,000  in  excess  of  its  original  capital  of 
$600,000. 

Can  there  be  a  better  illustration  of  the 
wonderful  influence  of  the  banks  of  the 
country  on  business  and  prices? 

A  simple  example  of  the  steps  by  which 
banks  increase  the  purchasing  power  of  a  com- 
munity is  the  following:  A  customer  of  this 
Chicago  bank  borrows  $60,000,  which,  being 
10  per  cent  of  the  capital  stock,  is  the  max- 
imum amount  which  can  be  legally  loaned  to 
one  individual,  giving  his  note  with  collaterals, 
and  receiving  a  credit  upon  his  bank  book  of 
$60,000,  less  the  interest  discount,  as  is  the 
general  custom.  He  does  not  draw  the  actual 
cash  from  the  bank,  but  gives  checks  against 


36       BANKING   SYSTEM    OF    UNITED    STATES. 

his  balance,  and  these  checks  are  re-depos- 
ited by  others,  the  check  and  clearing-house 
system  making  the  use  of  the  actual  cash 
unnecessary  as  between  the  first  borrower  and 
his  creditors,  and  between  his  creditors  and 
those  with  whom  they  settle.  Leaving  out  of 
account  the  interest  discount  paid,  the  bank, 
by  this  transaction,  increases  its  deposits  $60,- 
000,  and  increases  its  loans  and  discounts 
$60,000  —  its  assets  and  liabilities  being  thus 
increased  in  the  same  amount.  It  increases 
the  purchasing  power  of.  the  community  by 
the  sum  of  $60,000,  but  it  has  reduced  its 
loanable  funds  by  $15,000  (to-wit,  25  per  cent 
of  $60,000),  which  must  be  held  in  reserve, 
either  in  cash  or  in  other  banks,  as  a  protec- 
tion against  the  possible  calls  for  cash  upon 
the  additional  deposit  of  $60,000.  The  net 
increase  of  purchasing  power  in  the  com- 
munity by  this  transaction  is  therefore  $45,000. 
It  has  not  found  it  necessary,  in  this  transac- 
tion, to  draw  any  portion  of  its  balance  in 
New  York,  or  to  pay  out  any  cash. 


HOW   BANK-CREDIT  MONEY   IS   CREATED.     37 

This  creation  of  money  (for  such  is  the 
true  character  of  the  transaction)  is  based 
upon  two  assumptions:  ist.  That  the  bor- 
rower is  able  to  turn  his  note  into  cash  at 
maturity.  2d.  That  the  bank  is  able  to  turn 
the  checks  into  cash  upon  demand. 

We  have  already  shown  that  bank  deposits, 
since  they  are  the  basis  of  checks  and  drafts, 
have  a  great  deal  to  do  with  the  money  of  the 
country.  We  now  see  that  bank  loans,  since 
they  form  the  basis  of  a  large  part  of  bank 
deposits,  play  a  great  part  in  determining  the 
money  supply  of  our  country. 

Having  considered  the  connection-  between 
the  increase  of  loans  and  the  increase  in  de- 
posits, and  the  consequent  increase  in  the  pur- 
chasing power  of  the  community,  let  us  now 
consider  the  connection  between  a  decrease  in 
deposits,  and  the  resulting  decrease  in  loans, 
and  decrease  in  the  purchasing  power  in  the 
community.  Let  us  take  the  case  of  a  New 
York  bank  which  is  called  upon  to  ship  $150,- 
000  of  currency  to  one  of  the  banks  of  Chicago 


38       BANKING   SYSTEM   OF   UNITED   STATES. 

depositing  with  it.  Before  the  shipment  we 
will  suppose  the  following  to  be  a  condensed 
statement  of  the  condition  of  the  New  York 
bank: 

ASSETS.  LIABILITIES. 

Loans  and  discounts...  $1,000,000        Capital  stock $    250,000 

Cash  resources 250,000        Deposits -..     1,000,000 


$1,250,000  $1,250,000 

At  the  time  of  paying  the  Chicago  depositor 
$150,000,  the  cavshier  calls  in  $150,000  of  loans, 
which,  for  the  sake  of  our  illustration,  we  will 
suppose  are  paid  by  checks  on  his  own  bank. 
In  calling  in  $150,000  loans,  the  bank  takes 
that  much  bank-credit  money,  or  purchasing 
power,  from  the  community.  Its  loans  and 
discounts  are  reduced  $150,000,  its  cash  re- 
sources $150,000,  and  its  deposits  $300,000, 
leaving  the  statement  of  the  bank  as  follows : 

ASSETS.  LIABILITIES. 

Loans  and  discounts $850,000        Capital  stock $250,000 

Cash  resources 100,000        Deposits 700,000 

$950,000  $950,000 

But  we  readily  see  that  the  bank  must  con- 
tract its  loans  still  more,  since  the  remaining 

'  See  note  at  end  of  chapter,  page  42. 


HOW   BANK-CREDIT   MONEY   IS   CREATED.     39 

$100,000  cash  resources  lacks  $75,000  of  being 
25  per  cent  of  its  remaining  $700,000  deposits, 
to-wit,  $175,000. 

Therefore  the  bank  must  still  further  con- 
tract the  purchasing  power  of  the  community 
by  creating  again  the  proper  ratio  between 
cash  resources  and  deposits.  Assuming  again 
that  the  borrowers  pay  the  loans  which  are 
called,  by  checks  on  the  same  bank,  it  is  evi- 
dent that  in  this  case,  to  restore  the  25  per 
cent  proportion  of  cash  resources  to  deposits, 
loans  must  still  be  contracted  $300,000,  decreas- 
ing deposits  $300,000,  and  taking  that  amount 
of  purchasing  power  away  from  the  borrowers. 
Whether  the  loans  are  paid  by  checks  on  the 
bank  calling  them,  or  by  checks  on  other 
banks,  the  effect  on  the  purchasing  power  of 
the  community  is  the  same.  The  statement 
then   stands: 

ASSETS.  LIABILITIES. 

Loans  and  discounts $550,000       Capital  stock $250,000 

Cash  resources 100,000       Deposits 400,000 

$650,000  $650,000 


40       BANKING  SYSTEM   OF   UNITED   STATES. 

By  these  transactions,  therefore,  the  pur- 
chasing power  in  New  York  is  diminished  by 
$450,000.  This  amount  exactly  equals  the  pos- 
sible increase  in  purchasing  power  given  to 
Chicago,  if  the  Chicago  bank  chooses  to  use 
the  $150,000  cash  to  its  limit,  as  a  basis  for 
creating  bank-credit  currency.  It  can  loan 
credits  on  its  books  (deposits)  to  an  amount  of 
which  the  $150,000  cash  is  25  per  cent,  to- wit, 
$600,000.  As  the  $150,000  deposit  in  New 
York,  before  it  was  drawn  by  the  Chicago 
bank,  was  counted  a  cash  asset,  the  possible 
net  gain  in  Chicago  really  consists  of  the 
difference  between  $600,000  and  $150,000,  or 
$450,000. 

It  is  readily  seen  from  this  examination 
into  the  method  of  the  creation  of  bank-credit 
money,  which  permits  the  purchasing  power 
created  by  loans,  and  expressed  in  a  draft  or 
check  on  one  bank  to  be  deposited  as  a  cash 
asset  in  another,  that  deposits  in  banks  eventu- 
ally greatly  exceed  the  total  cash  supply  of  the 
country  which  is  furnished  by  the  Government. 


HOW    BANK-CREDIT   MONEY   IS   CREATED.     4I 

We  pointed  out  in  a  former  chapter  the  extent 
to  which  deposits  have  outgrown  the  cash 
supply  of  the  United  States.  The  reason  why 
the  exact  nature  of  the  effects  resulting  from 
the  ordinary  transactions  of  banking,  similar 
to  the  ones  forming  the  basis  of  our  illustra- 
tions, is  not  better  understood,  is  because,  as  a 
general  rule,  the  increase  and  reduction  of 
loans  and  deposits  and  bank-credit  currency 
take  place  quietly,  and  in  obedience  to  the 
normal  demands  of  business  communities, 
according  as  they  need  a  greater  or  less  amount 
of  money  in  the  transaction  of  their  legiti- 
mate and  ordinary  business.  The  transfer  of 
currency  and  credits  between  banks  and  differ- 
ent localities  under  normal  conditions  is 
largely  determined  by  the  fluctuations  in  inter- 
est rates  in  different  localities,  and  in  the  com- 
mon course  of  business  these  transfers  offset 
each  other,  and  all  goes  well.  Not  until  times 
of  panic  come,  when  the  banks  of  our  country, 
in  keeping  faith  with  the  depositors,  whom 
they  have  promised  to  pay  *'on  demand,"  are 


42        BANKING   SYSTEM    OF   UNITED    STATES. 

compelled  not  only  to  practically  cease  distrib- 
uting purchasing  and  debt-paying  power  in  the 
shape  of  loans,  but  to  destroy  it  by  calling  in 
loans  already  outstanding,  do  we  see  the  almost 
unlimited  dependence  of  our  people  upon  our 
banks,  and  the  true  value  of  banks  as  regula- 
tors of  the  business  machinery  of  the  country. 

'New  York  and  Chicago  are  "  Central  Reserve"  cities, 
and  their  National  Banks  are  required  by  law  to  keep  25 
per  cent  of  their  deposits  in  cash  in  their  vaults.  The 
illustration,  therefore,  would  technically  be  more  accurate 
if  the  banks  named  were  assumed  to  be  in  Omaha  and  New 
York  instead  of  Chicago  and  New  York. 


CHAPTER  IV. 

THE   RELATION   OF   BANK-CREDIT   CURRENCY 
TO    PRICES   AND   GENERAL    BUSINESS. 

In  these  days,  when  all  exchanges  are  made 
in  terms  of  money,  there  is  of  course  no  other 
one  thing  in  the  business  world  in  which 
people  are  more  interested  than  in  the  prices 
of  commodities,  measured  in  the  terms  of  the 
money  of  the  land.  As  prices  rise  and  fall,  so 
do  the  hopes  and  wealth  of  the  business  man. 
In  the  relation  of  the  price  of  a  certain  com- 
modity, which  must  be  paid  the  wholesaler,  to 
that  price  which  can  be  demanded  from  the 
customer,  lie  the  profits  of  the  great  multitude 
of  tradesmen.  In  the  relation  of  the  prices  of 
raw  material  to  the  prices  which  the  manufact- 
ured article  will  demand  from  the  public, 
depend  the  profits  of  the  manufacturer  and  the 

(43) 


44        BANKING   SYSTEM    OF   UNITED    STATES. 

wages  of  the  laborer.  The  relation  of  the  price 
of  to-day  to  the  price  of  to-morrow,  and  its 
effect  upon  the  relations  of  debtor  and  cred- 
itor, is  always  one  of  the  continuing  problems 
of  a  commercial  age.  The  laws  and  conditions 
which  govern  the  fluctuations  in  prices  are 
always  those  which  engage  the  earnest  atten- 
tion of  business  men.  Were  the  supply  of 
money  inflexible  in  amount   and   uniform   in 

f  value,  the  price  of  an  article  would  depend 
simply  upon  the  relation  of  the  demand  for  the 
article  to  its  supply.  But  it  is  evident  that 
in  addition  to  the  demand  for,  and  supply  of, 

^an  article,  its  price  must  depend  also  upon  the 
demand  for,  and  supply  of,  money,  in  terms  of 
which  the  price  must  be  expressed. 

This  being  true,  the  fluctuations  in  the 
money  supply  of  a  country  have  as  direct  an 
effect  on  prices  as  the  fluctuations  in  the  de- 
mand for,  and  supply  of,  an  article.  To  deter- 
mine, therefore,  the  true  effect  which  mone- 
tary conditions  are  having  upon  prices  of  com- 
modities, we  must  look  to  the  fluctuations  in 


ITS   RELATION   TO    GENERAL   BUSINESS.       45 

the  money  supply,  and  to  the  cause  of  the 
fluctuations.  And  we  must  remember,  also, 
that  the  supply  of  money  regulating  prices 
must,  as  we  stated  in  a  former  chapter,  be  con- 
sidered as  including  the  total  sum  of  all  bank 
credits  which,  in  relation  to  a  commodity,  have 
the  same  buying  power  as  money. 

When  we  admit  this  we  see  immediately 
that  the  fluctuation  in  prices,  caused  by  fluc- 
tuations in  money  supply,  is  largely  deter- 
mined by  the  nature  of  the  fluctuations  in 
the  amount  of  bank-credit  currency  in  circu- 
lation. From  the  reasoning  employed  in  our 
preceding  chapter  it  is  easily  seen  that  the 
banks  have  such  power  to  expand  the  circu- 
lation of  bank-credit  money  by  making  loans 
in  obedience  to  demands  for  money  that, 
under  ordinary  conditions,  an  increase  in  the 
demand  for  money  will  be  met  with  a  cor- 
responding increase  of  bank-credit  money — 
the  tendency  thus  being  to  keep  the  purchas- 
ing or  debt-paying  value  of  a  dollar  uniform. 
Accordingly    when    business    does    not    need 


w^ 


46        BANKING   SYSTEM   OF   UNITED   STATES. 

such  an  amount  of  money,  the  community  pays 
off  its  loans  to  save  interest,  and  there  occurs 
the  reduction,  both  in  loans  and  deposits, 
which  we  have  before  shown  means  a  decrease 
in  the  total  amount  of  purchasing  power  of 
the  people.  We  can  see,  therefore,  that  under 
normal  conditions  the  increase  or  decrease 
in  bank-credit  currency  has  a  tendency  to 
keep  the  purchasing  power  of  a  dollar  stable, 
since  these  increases  or  decreases  in  money 
supply  correspond  with  the  increases  or 
decreases  in  the  demand  for  money.  Owing 
to  the  fact,  however,  that  in  times  of  easy 
money,  loans  are  unfortunately  made  in  obedi- 
ence to  speculative  demands,  as  well  as  in 
accordance  with  the  legitimate  demands  of 
business,  prices  during  a  period  of  expanding^ 
loans  have  a  tendency  to  rise  higher  than 
they  would  if  loans  were  confined  to  the^ 
supplying  of  legitimate  business  alone.  In 
such  times,  prices  have  a  tendency  to  become 
fictitious.  During  a  period  of  contracting 
loans,    prices     have    a    tendency     to     remain 


ITS   RELATION  TO   GENERAL  BUSINESS.       4/ 

stationary,  or  to  fall.  Under  a  forced  con- 
traction of  loans,  prices  fall  with  extreme 
rapidity.  There  is  a  remarkable  correspond- 
ence between  the  rise  and  fall  in  prices  and 
the  increase  and  decrease  in  the  bank  loans 
of  the  United  States,  which  latter,  of  course, 
is  the  best  index  of  the  increase  or  decrease 
in  the  bank-credit  money  of  the  country. 
During  the  year  1893  we  had  a  remarkable  "^ 
illustration  of  the  extreme  sensitiveness  of 
prices  to  a  contraction  of  loans  and  a  decline 
in  bank  deposits. 

According  to  the  report  of  the  Comptroller 
of  the  Currency  for  1893,  the  deposits  in  the 
National  banks  of  the  country,  between  May 
4  and  October  4,  1893,  were  reduced  to  the 
enormous  extent  of  $378,119,563.  The  con- 
traction in  loans,  made  necessary  by  the  with- 
draw^al  of  these  deposits,  was  $318,767,691  ;  the 
contraction  in  balances  on  deposit  with  other 
banks  was  $51,198,856;  the  contraction  in 
stocks  and  securities  was  $2,177,912.  The 
banks  also  took  out  $31,265,616  of  new  circula- 


48        BANKING   SYSTEM   OF   UNITED   STATES. 

tion,  and  borrowed  in  various  ways  $36,615,092. 
All  this  contraction,  added  circulation,  and 
borrowing  was  made  necessary  by  the  with- 
drawal of  National  bank  deposits  alone.  The 
enormous  loss  in  purchasing  power  of  the  com- 
munity, caused  by  the  panic  of  1893,  is  difficult 
to  estimate,  owing  to  the  fact  that  it  is  impos- 
sible to  ascertain  from  the  very  complete  sta- 
tistics regarding  National  banks  collected  by 
the  Comptroller,  or  in  any  other  way,  the  pro- 
portion of  deposits  which  were  paid  out  in 
money  and  hoarded,  and  the  proportion  of  the 
decrease  in  deposits  which  resulted  in  the  can- 
celing of  deposits  against  loans  —  an  operation 
which,  while  it  lessens  the  possible  demands 
upon  a  bank,  actually  nets  the  bank  no  cash, 
and  destroys  in  large  proportions  the  purchas- 
ing power  or  bank-credit  money  of  the  com- 
munity in  the  manner  shown  in  the  preceding 
chapter.  This  much  is  certain,  at  least,  that 
the  contraction  of  National  bank  loans,  in  this 
period,  of  $318,767,691,  represented  a  net  loss  of 
that   much   purchasing  power  in   the   United 


ITS   RELATION   TO   GENERAL  BUSINESS.      49 

States.  To  this  loss  must  be  added  another 
enormous  loss,  resulting  from  the  decrease  in 
private  and  savings  banks  deposits  and  loans. 
In  his  report  for  1893,  the  Comptroller  says: 
''  The  fright  among  depositors  of  the  present 
year  appears  to  have  affected  all  classes  of 
banking  institutions  alike.  The  shrinkage  of 
deposits  of  National  banks,  from  May  4th  to 
July  12th  last,  exceeded  $190,000,000.  In  order 
to  ascertain  the  extent  of  the  shrinkage  in 
banks  other  than  National,  the  Comptroller  re- 
quested each  State  officer,  charged  with  the 
supervision  of  banks  organized  under  State 
authority,  to  submit  a  statement  showing  simi- 
lar information  with  respect  to  that  class  of 
banks.  Replies  were  received  from  the  officers 
of  twenty-three  States  and  two  Territories, 
indicating  that  the  loss  to  banks  of  this  char- 
acter corresponded  with  that  shown  by  the 
returns  from  National  banks.  Generally  no 
information  was  given  with  respect  to  savings 
banks,  and  much  less  regarding  private 
banks." 


50       BANKING   SYSTEM   OF   UNITED    STATES. 

Remembering  that  the  deposits  in  other 
banks,  here  referred  to  by  the  Comptroller, 
are  about  double  the  deposits  of  the  National 
banks  of  the  country,  we  feel  justified  in  as- 
suming, after  making  due  allowance  for  the 
fact  that  the  deposits  of  banks  other  than 
National  are  not  subject  to  check  to  such  an 
extent  as  are  those  of  National  banks,  that  the 
loss  in  purchasing  power,  or  bank-credit  cur- 
rency, due  to  the  withdrawal  of  deposits  in 
banks  other  than  the  National,  was  at  least  $350,- 
000,000,  making  the  total  reduction  of  bank- 
credit  money,  due  to  the  panic  of  1893,  aggre-  V^ 
gate  at  least  the  sum  of  $668,000,000.  We  feel 
that  this  sum  falls  far  short  of  expressing  the 
actual  loss  in  bank-credit  money,  or  purchas- 
ing power,  caused  by  the  panic  of  1893.  The 
low  range  to  which  the  prices  of  commodities 
in  the  United  States  were  reduced,  during  the 
year  1893,  was  caused  by  this  great  decrease  in 
bank-credit  currency.  The  great  extent  to 
which  they  were  reduced,  and  the  rapidity 
with  which  they  fell,  is  well  known. 


CHAPTER  V. 

THE    RELATION   OF   BANK-CREDIT   CURRENCY    TO 
THE   SILVER   QUESTION. 

The  great  desideratum,  in  the  matter  of 
money,  is  to  obtain  a  money  whose  purchasing 
and  debt-paying  power  remains  as  stable  as 
possible.  As  stated  before,  the  value  of 
money  is  determined  by  the  same  law  of  sup- 
ply and  demand  which  operates  in  the  case 
of  ordinary  commodities.  While  such  a  thing 
as  a  dollar  of  absolutely  uniform  purchasing 
and  debt-paying  power  is  unattainable,  it  is 
in  the  power  of  Government  to  prevent  a  very 
great  change  or  fluctuation  in  the  value  of  a 
dollar  by  wise  and  proper  laws.  Perhaps  tho 
questions  of  greater  importance  involved  in 
the  present  discussion  of  the  silver  question 
are  as  to  the  effect  of  free-silver  coinage  law 
(sO 


52       BANKING   SYSTEM    OF   UNITED   STATES. 

Upon  general  business  conditions,  and  upon  a 
contract  for  a  time  payment  of  money,  or,  in 
other  words,  upon  the  debtor  and  creditor 
classes.  The  effect  upon  the  laborer  and  the 
price  of  labor,  caused  by  an  enhancement  or 
depreciation  in  the  value  of  a  dollar  used 
simply  as  a  medium  of  exchange,  is  not  of  so 
great  importance,  since  the  prices  of  labor  and 
the  prices  of  commodities,  into  which  labor  is 
exchangeable  through  money,  are  affected 
equally  and  alike  by  the  change  in  the  stand- 
ard of  measure.  If  the  price  of  labor,  through 
an  enhancement  in  money,  falls,  the  price  of 
other  commodities  falls.  If  the  price  of  labor 
rises  through  a  depreciation  in  the  standard, 
the    price   of    other   commodities    rises   also.^ 


'  Hon.  J.  K.  Upton,  in  an  able  work  entitled  "  Money 
in  Politics,"  pages  144-145,  has  the  following  remarks  and 
table:  "  To  those  who  believe  that  the  aggregate  exchange 
value  of  a  circulating  medium  can  be  increased  or  dimin- 
ished by  the  will  of  Congress,  or  any  human  agency,  is 
commended  the  fact  that  after  sixteen  years  of  legisla- 
tive effort,  by  which  the  face  value  of  the  circulation  was 
reduced  more  than  $300,000,000,  the  coin  value  was  reduced 


ITS    RELATION   TO    SILVER   QUESTION.         53 

Therefore  the  chief  evil,  apart  from  the  injury 
done  general  business,  which  results  from  a 
disturbance  in  the  value  of  the  standard  as 
measured  in  commodities,  is  found  in  its  dis- 
turbance of  the   relation   between  the  debtor 


less  than  $6,000,000.  The  great  law  of  demand  and  supply- 
fixed  the  amount  needed  and  mocked  the  futile  efforts  of 
those  who  tried  to  overrule  it.  The  following  statement 
shows  in  tabular  form  the  changes  which  took  place  in  the 
amount  and  valuation  of  the  paper  circulation  for  the  years 
named: 

Statement  Showing  the  Amount  in  Millions  of  Outstand- 
ing Paper  Circulation,  and  its  Value  in  Coin,  Together 
WITH  the  Value  in  Coin  of  One  Dollar  in  Paper,  at  the 
Close  of  Each  Fiscal  Year,  From  1865  to  1879,  Inclusive. 


Year  Ending 
June  30. 


1865 

1866 

1867 

1868 

1869 

1870  

1871 

1872 

1873 

1874 

1875 

1876 

1877 

1878... 

1879,  January  ist 


Amount 

of  Circulation. 

Millions. 


983 


827 
770 
756 
745 
748 
738 
750 
781 
773 
738 
698 
688 
686 


Coin  Value  of 

Circulation. 

Millions. 


697 
589 
587 
540 
552 
633 
665 
646 
648 
711 
674 
656 
662 
684 
686 


Coin  Value  of 

One  Dollar 

of  Paper. 


•  71 

.66 

•71 
.70 

•73 

•85 

•89  , 

•87K 

.86K 

.91 

.87 


•95  ^ 
•99M 


54        BANKING   SYSTEM    OF    UNITED   STATES. 

and  creditor,  between  whom  there  is  a  contract 
calling  for  a  second  transfer  of  money  after  a 
certain  time.  If  money  appreciates  in  value, 
it  takes  more  goods  to  get  the  money  to  pay 
the  debt  with  than  the  money  borrowed  could 
buy,  and  the  debtor  is  wronged.  If  money 
depreciates,  it  takes  less  goods,  and  the  cred- 
itor is  wronged.  The  question,  however,  of 
the  increase  or  decrease  of  the  amount  of  the 
standard  money  —  gold  —  does  not  play  such  an 
important  part  in  burdening  or  relieving  the 
debtor  class,  as  many  of  the  advocates  of  free 
silver  would  have  us  believe. 

A  characteristic  of  free-silver  arguments, 
which  seems  to  be  common,  is  an  apparent 
assumption  that  the  purchasing  power  of  a 
dollar  in  a  gold-standard  country,  whether 
that  dollar  be  expressed  in  a  legal-tender 
note,  a  silver  coin,  or  a  bank  draft,  is  wholly 
determined  by  the  value  of  gold,  without  the 
value  of  the  gold  being  affected  by  the  con- 
current use  of  the  silver  and  paper  money, 
which  does  the  work  of  gold  money.     Tables 


ITS    RELATION   TO   SILVER   QUESTION.         55 

are  given  to  show  the  ratio  of  gold  increase 
to  population  increase,  the  amount  of  gold 
increase  to  increase  in  property  values  and 
business  transactions,  the  implication  being 
that  the  failure  to  pass  a  free-silver  coin- 
age law  throws  upon  gold  a  burden  which 
has  been  growing  faster  in  proportion  than 
the  supply  of  gold  has  been  increasing, 
thereby  adding  enormously  to  the  value  of 
gold,  and  therefore  to  the  value  of  money, 
thus  working  an  injustice  to  the  debtor 
class.  Until  this  argument  is  analyzed,  it 
seems  strong. 

Its  chief  error  consists  in  this  :  That  it  fails 
to  take  into  consideration  bank-credit  money, 
which  is  the  most  influential  kind  of  money 
in  determining  the  ease  or  difficulty  with 
which  debts  are  paid.  This  kind  of  an  argu- 
ment seems  to  be  based  upon  a  false  premise. 
That  false  premise  is  that  a  gold  standard  is 
something  that  stands  off  by  itself,  as  it  were, 
and  that  any  increase  or  decrease  in  its 
amount  increases    or   decreases  the  value    of 


56       BANKING   SYSTEM   OF   UNITED    STATES. 

every  dollar  in  circulation  in  the  proportion 
of  the  amount  of  increase  or  decrease  of 
gold  to  the  total  amount  of  gold. 

Always  assuming  that  the  Government 
of  the  United  States  maintains  in  its  Treasury, 
as  under  its  present  policy,  the  comparatively 
small  amount  of  gold  necessary  to  meet  any 
demands  for  redemption  of  its  other  currency, 
which,  in  the  light  of  experience  and  existing 
conditions,  may  be  made,  the  fact  is  that, 
under  our  money  system,  the  increase  in  the 
^world's  gold  supply,  or  our  own  gold  supply, 
cuts  very  little  figure  in  the  determination  of 
the  purchasing  or  debt-paying  value  of  a  dollar. 

No  system  of  logic  can  disprove  the  propo- 
sition that  the  value  of  money  depends  upon 
the  law  of  supply  and  demand.  If,  therefore, 
the  supply  of  money  is  increased  by  bank- 
credit  currency,  the  value  of  money  measured 
in  -commodities,  including  gold  money,  is 
decreased;  and  correspondingly,  when  bank- 
credit  currency  is  contracted,  and  the  total 
supply    of    money    is    thus    diminished,    the 


ITS    RELATION   TO    SILVER   QUESTION.         5/ 

value  of  all  money,  including  gold  money,  is 
increased. 

When  we  remember  that  the  proportion  of 
bank-credit  money  used  in  business  is  ordina- 
rily over  ten  times  the  amount  of  cash  money, 
we  can  see  that  the  fluctuations  in  bank-credit 
money  have  a  greater  effect  upon  the  purchas- 
ing and  debt-paying  power  of  actual  money 
than  any  other  one  cause.  The  effect  of  the 
annual  increase  or  decrease  in  the  output  of 
gold  at  the  mines,  or  as  money,  pales  into 
insignificance  in  comparison.  Thus  we  see 
that  where  the  banking  business  is  extended, 
as  it  is  in  this  country,  and  where  the  Govern- 
ment, for  the  purpose  of  keeping  ample  the 
money  supply,  injects  its  credit,  with  proper 
restrictions,  into  the  currency,  as  in  this  coun- 
try, the  fact  that  we  use  a  gold  standard,  and 
are  on  a  gold  basis,  and  repealed  the  Sherman 
law,  which  was  becoming  a  menace  to  our 
ability  to  keep  on  a  gold  basis,  does  not  justify 
any  one  in  assuming  that  a  crime  against  the 
debtor  class  is  being  committed. 


58        BANKING   SYSTEM   OF   UNITED   STATES. 

The  more  the  money  question  is  studied, 
the  more  does  the  fact  become  apparent  that, 
where  such  an  immense  volume  of  business 
is  transacted  through  the  banks,  the  most 
important  factor  which  goes  to  make  up  the 
purchasing  and  debt-paying  power  of  that 
most  uncertain  measure,  the  dollar,  is  the 
t^ondition  of  the  banks,  and  the  relation  of 
vpublic  confidence  to  the  banks,  upon  which  the 
banking  business  is  based.  Common  experi- 
ence teaches  us  this  truth.  When  does  money 
become  more  valuable,  and  goods,  measured  in 
money,  less  valuable,  than  in  a  bank  panic, 
when  depositors  are  ''running  on  the  banks"? 
When  deposits,  which  form  the  largest  basis 
for  bank-credit  money,  are  withdrawn,  the 
value  of  a  dollar,  under  the  operation  of  the 
law  of  supply  and  demand,  increases,  and  the 
prices  of  wheat,  corn,  pork,  iron,  and  other 
commodities  go  down  almost  with  a  rush. 

Advocates  of  the  free  coinage  of  silver  give 
tables  covering  many  years,  by  which  they 
attempt  to  show,  by  a  decrease  in  cost  of  wheat 


ITS    RELATION   TO    SILVER   QUESTION.         59 

and  corn,  etc.,  an  increase  in  the  value  of  a 
dollar  in  a  gold-standard  country,  or,  as  they 
unjustly  term  it,  an  increase  in  the  value  of 
"  gold,"  using  it  as  synonymous  with  money. 

The  impossibility  of  gauging  accurately  the 
value  of  a  commodity  like  gold,  which  is  sub- 
ject to  the  law  of  supply  and  demand,  by  its 
average  equivalent  in  other  commodities  also 
subject  to  their  laws  of  supply  and  demand, 
especially  when  the  value  of  gold  money  is 
influenced  by  the  supply  and  demand  of  other 
money  doing  the  work  concurrently  with  gold 
and  in  place  of  gold,  the  volume  of  which 
other  money  fluctuates  constantly,  has  always 
seemed  to  us  very  manifest.  And  when  we 
contemplate  the  immense  fluctuation  which 
has  occurred  in  the  purchasing  and  debt-pay- 
ing power  of  a  dollar,  during  this  last  year,  in 
this  ''  gold  standard  "  country,  we  are  still  more 
inclined  to  doubt  the  reliability  of  these  tables, 
whose  makers  have  assumed  such  a  scientific 
air. 

The  fact  of  the  matter  is  that,  when  public 


6o        BANKING   SYSTEM    OF   UNITED   STATES. 

•confidence  in  the  banking  institutions  of  this 
country  exists,  the  bank-credit  currency,  being 
flexible,  is,  as  one  might  almost  say,  automat- 
ically regulated  in  volume  according  to  the 
needs  of  business  ;  and  this  fact  has  much  more 
of  an  effect  in  keeping  stable  the  value  of  a 
dollar  than  the  arbitrary  amount  of  increase  or 
decrease  in  the  annual  output  of  either  gold  or 
silver,  in  their  relation  to  population  or  prop- 
erty increase,  can  ever  have.  When  panic 
conditions  are  absent,  and  when  money  is 
being  loaned  by  our  banks  in  amounts  neces- 
sary to  supply  the  needs  of  business,  we  sel- 
dom hear  any  complaint  about  falling  prices 
and  the  "  robbery  of  the  debtor." 

When,  after  a  panic,  confidence  in  banking 
institutions  has  been  restored,  money  com- 
mences to  flow  out  from  the  banks  in  loans, 
and  bank-credit  currency  slowly  expands  to 
meet  the  demands  of  a  recuperating  and  grow- 
ing business.  A  panic,  such  as  we  have  just 
passed  through  in  1893,  is,  as  has  often  been 
s^'''  said,  the  result  of  overtrading.     Credits  which, 


ITS   RELATION   TO    SILVER   QUESTION.         6l 

with  the  aid  of  banks  and  the  naturally  ven- 
turesome disposition  of  the  ordinary  man, 
always  increase  and  grow  faster  than  govern- 
ments ever  issue  money,  eventually  become  so 
out  of  proportion  to  values,  and  the  amount  of 
money  in  circulation,  that  their  scaling  down 
can  not  be  accomplished  without  creating 
widespread  distrust,  which  attacks  the  worthy 
along  with  the  unworthy,  and  withdraws  from 
business,  money,  just  at  the  time  it  is  most 
needed  in  the  re-adjustment  of  too  expanded 
credits.  It  is  considered  an  able  argument  by 
some  to  point  out  the  immense  expansion  of 
credits  —  both  governmental,  railroad,  and  pri- 
vate—  reaching  into  the  tens  of  billions  of  dol- 
lars, and  then  to  point  out  the  disproportion  of 
debts,  to  be  paid  in  money,  to  the  amount  of 
money  which  is  available  to  pay  them,  espe- 
cially of  gold,  using  this  as  an  argument  to 
show  the  necessity  of  more  money.  Unfortu- 
nately, the  more  money  governments  issue  or 
coin,  the  greater  becomes  the  proportionate 
growth  of  credits.     History  conclusively  shows 


62        BANKING   SYSTEM    OF   UNITED    STATES. 

that  an  inflation  of  the  currency,  or,  in  other 
words,  any  large  amount  of  money  in  circula- 
tion in  excess  of  the  ordinar).  amount,  is  fol- 
/  lowed  by  what  is  called  an  era  of  speculation, 
in  which  great  bubbles  of  credit  are  blown,  the 
bursting  of  which  inevitably  brings  a  panic 
with  all  its  dire  results.  In  other  words,  if, 
with  the  idea  of  lessening  the  disproportion 
between  credits  and  money  in  times  of  general 
business  prosperity,  you  increase  the  amount 
of  money  in  circulation,  instead  of  using  the 
increased  amount  of  money  in  the  liquidation 
of  existing  indebtedness,  society  uses  it  as  a 
basis  for  the  creation  of  additional  credits, 
bringing  about  a  worse  state  of  affairs  than 
before.  The  only  time  when  a  sudden  increase 
of  money  in  large  sums  is  beneficial  to  a  com- 
munity is  when  the  process  of  liquidation  has 
commenced,  when  the  bubble  is  burst,  and 
when  an  increase  of  money  operates  to  build 
up  a  stronger  foundation  for  the  castle  of  busi- 
ness rather  than  to  build  fancy  turrets  on  its 
top.     When  we  leave  out  of  account  the  credit 


ITS   RELATION   TO    SILVER   QUESTION.         63 

substitutes  for  money,  so  enormous  is  the 
amount  of  governmental,  railroad,  and  private 
debts  of  the  world  that,  for  all  practical  pur- 
poses, the  sum  of  all  the  gold  and  silver  in  the 
world  is  as  inadequate  to  pay  them  as  either 
gold  or  silver  alone. 

The  truth  of  the  matter  is  that  no  man 
lives,  no  government  exists,  which  can  devise 
an  absolutely  equitable  currency  system.  No 
inflexible  system  can  be  ample  enough  to 
accommodate  itself  successfully  to  what  are 
known  as  panic  times,  and  not  lead  to  over- 
speculation  in  other  times.  The  crying  need 
of  the  day  is  for  a  currency  so  flexible  in  the 
hands  of  the  Government  that,  when  bank- 
credit  currency  is  diminished  by  widespread 
withdrawal  of  deposits,  and  life-blood  is  being 
drawn  from  business,  it  can  be  increased  by 
the  Government  under  some  such  plan  as 
exists  in  England  to-day,  or  under  some  other 
proper  restrictions,  and  in  some  way  used  to 
lessen  the  awful  process  of  such  a  liquida- 
tion as  that  of  1873  and   1893. 


64     ^NKING   SYSTEM   OF   UNITED   STATES. 

The  need  of  the  existence  of  such  a  power 
in  our  Government  is  shown  by  the  enforced 
creation  of  a  substitute  for  money,  in  the 
shape  of  clearing-house  certificates,  by  the 
New  York  and  Boston  clearing-houses  dur- 
ing the  last  summer.  That  this  is  the  ques- 
tion of  the  day,  and  not  the  simpler  one  of 
a  standard,  is  easily  shown.  Populists  and 
others,  seeing  the  evil  effects  of  our  too 
inflexible  currency,  have  assumed  these  evil 
effects  have  largely  arisen  from  the  demone- 
tization of  silver,  and  the  lack  of  that  contra- 
diction in  ideas,  a  ''  double  standard." 

To  convince  ns  that  the  increase  of  money, 
incident  to  the  passage  of  a  free-silver  coin- 
age law,  will  not  correct  all  the  evils  to  which 
the  debtor  is  subject  under  our  present  sys- 
tem, we  have  but  to  remember  that  in  the 
short  period  of  five  months  of  the  year  1893 
there  was  destroyed,  by  the  panic  in  the 
United  States,  bank-credit  money  to  the 
amount  of  at  least  $668,000,000,  a  sum  equal 
to  the  total  silver  production,  at  the   present 


ITS   RELATION   TO   SILVER   QUESTION.        65 

rate,  of  all  the  silver  mines  in  the  United 
States  for  over  nine  years,  not  sparing  any 
for  use  in  the  arts. 

An  intelligent  debtor  soon  comes  to  tinder 
stand  that  those  influences  and  forces  which 
tend  to  unsettle  general  confidence  in  mone- 
tary conditions,  are  the  causes  which  lead  to 
his  greatest  oppression  and  loss.  Such  causes 
tend  not  only  to  stimulate  creditors  (includ- 
ing bank  depositors)  into  calling  for  their 
principal,  but  to  frighten  others  from  loan- 
ing and  investing,  thus  making  re-borrowing 
impossible,  and  necessitating  often  the  sale 
of  securities  and  property  at  a  great  sacrifice, 
since  they  must  be  sold  when  the  public  are 
afraid  to  buy. 

Of  all  influences  which  are  injurious  to 
debtors,  those  which  tend  to  bring  about  a 
change  of  monetary  standards  are  the  worst, 
especially  in  the  United  States,  where  such 
a  large  amount  of  silver  and  gold  is  circu- 
lating side  by  side  as  at  present.  Under  the 
operation    of    Gresham's  law,  which    is  that, 


66       BANKING  SYSTEM   OF  UNITED   STATES. 

under  such  conditions,  the  cheaper  money 
will  drive  the  dearer  money  out  of  circula- 
tion, there  would  be  driven  out  of  our  circu- 
lation, by  a  lapse  on  the  part  of  our  Govern- 
ment from  the  present  gold  standard  to  the 
cheaper  silver  standard,  our  entire  gold  cir- 
culation, amounting  to  about  $500,000,000. 

A  change  of  standards  unsettles  credits; 
it  unsettles  banking;  it  unsettles  business ;  it 
unsettles  international  exchanges  unless  all 
nations  act  as  a  unit  in  the  change.  We 
are  unable  to  see  how  a  change  of  standards, 
in  the  United  States  alone,  can  prove  of 
either  temporary  or  eventual  benefit  to  the 
debtor. 


CHAPTER   VI. 

ONE  PRESENT    NEED   OF    OUR    NATIONAL  BANK- 
ING  SYSTEM. 

It  has  been  our  effort  to  point  out  in  this 
little  volume  the  extent  of  the  dependence 
of  the  prosperity  of  our  nation  and  our  people 
upon  the  normal  operation  of  our  present 
banking  system.  The  most  disastrous  blow 
which  the  business  interests  of  our  country 
can  receive,  consists  in  the  weakening  of  the 
confidence  of  the  depositors  in  the  ability  of 
our  banks  to   redeem   deposits. 

Under  our  present  laws  and  business 
methods,  banking  and  industrial  panics  have 
occurred  together.  If  it  were  not  for  the 
necessity  upon  the  banks  of  paying  fright- 
ened depositors  during  an  industrial  panic, 
the  solvent  and  worthy  institutions  of  the 
(67) 


68        BANKING   SYSTEM   OF   UNITED   STATES. 

country  would  never  be  forced  into  liquida- 
tion because  of  an  inability  to  turn  unques- 
tioned collaterals  into  cash.  Under  our  system 
of  doing  business,  times  of  liquidation  must 
periodically  occur  wben  too  expanded  credits 
must  be  adjusted  to  true  values.  It  should 
never  be  admitted,  however,  that  these  peri- 
ods of  general  liquidation  must  be  accom- 
panied, as  they  have  generally  been  heretofore 
in  this  country,  by  runs  on  the  banks  and 
the  withdrawal  of  active  capital  from  business 
to  go  into  old  stockings  or  safety-deposit 
boxes,  at  a  time  when  it  is  most  needed  in 
the  general  re-adjustment  of  credits.  Could 
banks,  in  times  of  business  liquidation,  be 
assured  that  they  would  not  have  unusual 
demands  for  deposits,  they  could  successfully 
maintain  thoroughly  solvent  individuals  or 
corporations  from  financial  destruction,  which 
sometimes  comes  to  them  from  demands  for 
quick  payments  from  frightened  creditors. 
To  so  build  up  the  confidence  of  the  people 
in   the   safety   of    National    banks  as   deposi- 


ONE   PRESENT  NEED.  69 

tories  that,  in  times  of  business  panic,  de- 
posits would  not  be  withdrawn  —  to  make 
such  a  thing  as  a  bank  panic  impossible  —  is, 
perhaps,  something  which  is  difficult  of 
accomplishment. 

There  is  one  law,  however,  which  has  already 
been  considered  somewhat  in  Congress,  the 
passage  of  which,  in  a  proper  form,  seems  to 
us  of  vital  importance.  That  law  is  one  which 
should  levy  a  tax  upon  National  banks  for  the 
purpose  of  creating  a  fund  to  be  held  by  the 
United  States  Treasury  for  the  re-imburse- 
ment  of  depositors  in  failed  National  banks. 
National  banking  statistics  show  that  a  fund 
of  the  necessary  amount  would  soon  be  created 
by  a  comparatively  small  tax  upon  each 
National  bank.  The  Government,  in  the  inter- 
ests of  the  fund,  would,  of  course,  take  an 
assignment  of  the  claims  of  depositors  against 
the  assets  of  the  failed  institution.  The  levy 
of  the  annual  tax  on  each  bank  for  the  crea- 
tion of  such  a  fund  should  most  equitably  be 
based  upon  the  average  line  of  deposits  of  the 


70       BANKING   SYSTEM   OF   UNITED   STATES. 

bank  for  the  preceding  year.  This  system 
would  seem  to  be  more  equitable  than  to  base 
the  tax  upon  the  capital  of  the  bank,  or  in  any 
other  arbitrary  way.  It  must  certainly  be 
admitted  that  the  establishment  of  such  a  fund 
would  have  a  tendency  to  prevent  the  mad 
rushes  of  small  and  large  depositors  during 
times  of  panic  for  money,  which  they  hoard 
away  in  safety-deposit  boxes  or  other  hiding 
places.  A  certain  loss  of  deposits  will  always 
necessarily  be  incident  to  industrial  panics ; 
but  we  will  all  agree  that  the  deposit  losses 
which  are  most  acutely  felt  by  the  business 
community  consist  of  those  which  are  paid  out 
over  the  counter  in  cash  to  panic-stricken  cus- 
tomers, who  do  not  draw  their  deposits  because 
of  other  demands  upon  them,  but  because  they 
fear  the  loss  of  their  money  if  they  allow  it  to 
remain. 

Such  a  law  might  contain  provisions  for  a 
more  rigid  system  of  National  bank  examina- 
tion, and  still  further  contract  the  powers  of 
the  active  officials  in   their  rights  of  borrow- 


ONE  PRESENT  NEED.  /I 

ing  from  the  bank  under  their  management. 
Such  a  law  would  probably  have  the  effect  of 
increasing  the  deposits  in  National  banks,  and 
thus  offer  to  them  compensations  for  the  tax 
levied  upon  them  for  the  creation  of  the  fund. 
If  the  effect  of  such  a  law  would  be  to  ren- 
der bank  deposits  more  stable  under  all  condi- 
tions, as  in  our  judgment  would  be  the  case, 
no  law  could  be  of  more  value  and  importance 
to  the  debtor,  or  to  the  creditor,  or  to  the  com- 
munity at  large.  If  such  a  law  had  been  in 
force  for  several  years  prior  to  and  during  1893, 
there  might  have  been  now  in  prosperous 
existence,  hundreds  of  the  then  solvent  busi- 
ness institutions  and  individuals  ruined  by  the 
panic  of  that  year.  Besides  the  great  impor- 
tance of  the  law,  as  related  to  the  general 
prosperity  of  the  country,  it  is  meritorious,  as 
preventing  the  keen  suffering  in  those  locali- 
ties where  bank  failures  occur,  and  where  the 
hard-earned  savings  of  the  community,  under 
our  present  laws,  are  often  swept  entirely 
away.     By  such  a  law,  losses  are  distributed 


72       BANKING  SYSTEM   OF   UNITED   STATES. 

as  by  insurance,  the  beneficial  effects  of  which 
need  no  argument. 

To  the  passage  of  such  a  law  in  proper 
form,  we  trust  the  efforts  of  Congress  will  be 
directed. 


APPENDIX. 


In  submitting  the  preceding  pages  to  a  friend 
for  criticism,  the  writer  received  such  a  concise 
and  able  statement  of  objections  to  his  views 
that  he  gives  it  here,  together  with  his  answer. 

The  criticism,  which  I  have  divided  for  purpose 
of  reference  into  two  parts,  reads  as  follows: 

Part  A. —  "The  propositions  open  for  discus- 
sion would,  of  course,  be  those  which  relate  to 
the  relative  power,  in  determining  prices,  of 
money,  and  the  various  forms  of  credits  which,  by 
the  operations  of  banking,  are  made  to  take  the 
place  of  currency  or  circulation.  Granting  that 
the  amount  of  these  is  very  much  larger  than  the 
amount  of  real  money,  do  they  become,  therefore, 
potent  in  the  ratio  of  these  amounts  in  controll- 
ing and  determining  prices  ?  But  prices  are  the 
measure  of  the  value  of  money,  meaning  neither 

(73) 


74  APPENDIX. 

more  nor  less  than  the  scale  of  exchange  of  money 
for  commodities.  The  question,  then,  may  take 
the  form:  Does  the  gross  amount  of  bank  and 
other  credits  fix  the  value  of  money  ?  We  must 
be  careful  to  distinguish  here  between  intrinsic 
value  and  the  rate  of  interest  —  the  former  is 
what  we  are  now  dealing  with. 

"Your  argument  seems  to  be  this:  If  the  forms 
of  credit  used  in  trade  are  a  hundred  to  one  greater 
than  the  real  money  in  circulation,  the  intrinsic 
value  of  the  money  is  of  almost  no  importance, 
for  the  influence  of  the  circulating  credits  is  a 
hundred  times  more,  upon  prices. 

Part  B. — "Let  us  test  this:  Suppose  a  gov- 
ernment, not  having  the  historical  lessons  about 
debasing  the  coin  before  its  eyes,  should  so  de- 
base its  gold  and  silver  money  as  to  make  it  prac- 
tically a  pewter  coinage  of  the  same  size,  etc., 
what  would  be  the  result  ?  Would  you  say  that,  as 
the  coin  is  only  in  nominal  amount  one-hundredth 
as  much  as  the  forms  of  circulating  credits,  there- 
fore the  debasing  is  of  little  comparative  impor- 
tance ?     What  is  each  note  or  bill  of  exchange  but 


APPENDIX.  75 

a  promise  to  pay  the  legal  money  ?  Its  value  (the 
note  or  bill)  is  only  so  many  of  the  standard  units. 
If  those  units  have  been  diminished  in  value,  all 
your  notes  and  bills  have  suffered  the  same  dete- 
rioration. If  the  coin  has  been  reduced  to  one- 
hundredth  of  its  value,  the  gross  amount  of  all  out- 
standing forms  of  credit  has  been  reduced  in  like 
ratio.  You  may  have  cut  down  a  million  in  coin 
to  ten  thousand.  Can  you  say  that  the  loss  is 
only  990,000  out  of  a  gross  circulation  of  101,000,- 
000?  No;  3^ou  have,  by  the  same  act,  taken  the 
99  per  cent  out  of  the  value  of  every  note  and 
bill  of  the  whole  hundred  millions. 

"As  a  question  of  exchange,  it  seems  to  me  to 
be  essentially  the  same  as  if  your  notes  and  bills 
were  payable  in  another  commodity,  say  wheat. 
If  wheat  has  gone  down  from  $1  to  50  cents  a 
bushel  during  the  life  of  your  paper,  the  makers 
will  only  pay  half  as  much  to  take  it  up.  It  is 
this  relation  of  all  promises  to  pay  to  the  vahie  of 
the  luiit  in  which  payment  is  to  be  made  which 
seems  to  me  to  make  it  fatally  erroneous  to  treat 
these  promises  to  pay  as  if  'real  monc}*.'  In 
every  '  corner '  of  a  market  the  tremendous  nature 


76  APPENDIX. 

of  the  transaction  and  its  consequences  is  deter- 
mined by  the  price  of  the  article^  though  there 
may  be  very  few  bushels  actually  in  the  elevators, 
etc.  This  seems  to  be  the  heart  and  soul  of  the 
whole  theory  of  a  standard.  If,  by  any  means, 
natural  or  artificial,  the  value  of  the  standard  is 
changed,  you  affect,  in  the  same  ratio,  the  value  of 
all  outstanding  contracts  to  pay  in  that  standard." 

Answer: 

I.  To  that  part  of  criticism  marked  "A  " — 

You  state  that  "  Granting  that  the  amount  of 
these  (/.  e.  banking  credits)  is  very  much  larger 
than  the  amount  of  real  money,  do  they  become, 
therefore,  potent  in  the  ratio  of  these  amounts  in 
controlling  and  determining  prices  ?  "  Farther 
on:  "We  must  be  careful  to  distinguish  here 
between  intrinsic  value  and  the  rate  of  interest  — 
the  former  is  what  we  are  now  dealing  with." 

Here,  in  effect,  I  think,  you  ask  a  distinction  to 
be  made,  for  the  sake  of  argument,  that  is  not 
made  in  the  transaction  of  business  by  the  com- 
munity.    If,  in   purchasing   a   commodity,  I   pay 


APPENDIX.  TJ 

with  an  instrument  of  credit,  such  as  a  bill  of  ex- 
change, which  does  the  work  in  the  transaction  of 
an  equal  amount  of  the  standard  money — gold  — 
from  an  economic  standpoint  the  resulting  effect 
upon  prices,  caused  by  the  transaction,  is  the  same 
as  if  gold  money  had  been  used.  The  fact  that 
the  business  community  accepts  indifferently 
either  gold  money,  which  is  intrinsically  valuable, 
or  a  bank  draft,  which  is  not  intrinsically  valuable, 
and  makes  no  distinction  betw^een  them,  makes,  in 
the  resultant  effect  upon  prices,  the  drafts  more 
of  a  factor  than  the  standard  money.  And  any 
increase  in  the  money  supply  or  purchasing  power 
in  use,  if  it  may  be  so  expressed,  whether  it  be 
credit  money  in  the  form  of  checks,  or  gold 
money,  has  its  direct  effect  in  fixing  the  value  of 
money  as  measured  in  commodities.  The  prin- 
ciple involved  in  the  relation  of  the  various  forms 
of  credit  to  prices  for  which  we  contend  is  well 
established.  John  Stuart  Mill,  in  his  "  Principles 
of  Political  Economy,"  states  it  in  the  following 
strong  language:  '*  In  a  state  of  commerce  in 
which  much  credit  is  habitually  given,  general 
prices  at  any  moment  depend  much  more  upon 


78  APPENDIX. 

the  state  of  credit  than  upon  the  quantity  of 
money.  For  credit,  though  it  is  not  productive 
power,  is  purchasing  power;  and  a  person  who, 
having  credit,  avails  himself  of  it  in  the  purchase 
of  goods,  creates  just  as  much  demand  for  the 
goods,  and  tends  quite  as  much  to  raise  their 
price  as  if  he  made  an  equal  amount  of  purchase 
with  ready  money." 

Now,  taking  your  own  statement  — "  but  prices 
are  the  measure  of  the  value  of  money,  mean- 
ing neither  more  nor  less  than  the  scale  of 
exchange  of  money  for  commodities" — in  connec- 
tion with  the  well-recognized  principle  here 
stated  by  Mill,  I  answer  your  question — "Does 
the  gross  amount  of  bank  and  other  credits  fix 
the  value  of  money?" — as  follows: 

The  supply  of  money,  regulating,  in  accord- 
ance with  the  demand,  its  value,  includes  bank- 
credit  money,  as  defined  before,  as  well  as 
actual  money  (to-wit,  money  issued  by  the  Gov- 
ernment). Therefore  the  value  of  all  money, 
expressed  in  commodities,  is  fixed  more  by  the 
gross  amount  of  bank  credits  in  commercial  use 
as  money  (since  they  constitute  the  bulk  of  our 


APPENDIX.  79 

money)  than  it  is  by  the  amount  of  standard 
money  in  use,  provided  always  that  the  par  of 
exchange  is  theoretically  and  practically  main- 
tained, as  under  present  conditions.  To  make  a 
distinction  in  the  effect  upon  prices,  and  there- 
fore in  the  effect  upon  the  value  of  money, 
between  increases  or  decreases  in  the  supply  of 
actual  money,  and  in  the  supply  of  credit  sub- 
stitutes for  money,  is  impossible.  The  sum  of 
the  two  fixes  the  value  of  money  as  measured 
in  commodities.  An  increase  or  decrease  in  the 
supply  of  either  affects  the  value  of  all  in  an 
amount  equal  to  the  proportion  of  the  amount 
of  increase  or   decrease   to  the  sum  of   the  two. 

2.  To  that  part  of  criticism  marked  "  B  "  — 

Relative  to  the  part  of  your  criticism  which  I 
have  marked  "  B,"  you  state:  "What  is  each 
note  or  bill  of  exchange  but  a  promise  to  pay  the 
legal  money  ?  Its  value  (the  note  or  bill)  is  only 
so  many  of  the  standard  units.  If  those  units 
have  been  diminished  in  value,  all  your  notes  and 
bills  have  suffered  the  same  deterioration." 

I  agree  fully  with  you  that  the  debasing  of  the 


8o  APPENDIX. 

Standard  debases  or  reduces  in  value  outstanding- 
forms  of  credit  circulation  or  substitutes  for 
money.  Where  we  differ  is  as  to  what  must  be 
considered  in  determining  how  much  the  *'  stand- 
ard units  "  have  been  diminished  in  value.  My 
contention  is  that  where  credit  substitutes  for  the 
"  standard  units  "  do  the  work  in  redeeming  these 
notes  or  bills  of  exchange,  as  well  as  *'  standard 
units  "  themselves  would  do  it,  under  the  law  of 
supply  and  demand  the  amount  of  credit  sub- 
stitutes in  existence  affect  the  value  of  the  stand- 
ard units,  and  therefore  the  value  of  these  units 
is  determined  by  the  relation  of  the  factor  of  de- 
basement to  the  sum  of  "standard  units"  and 
credit  substitutes,  not  simply,  as  you  suggest,  upon 
the  relation  of  the  factor  of  debasement  to  the 
amount  of  "  standard  units  "  alone. 

In  order  to  make  myself  clear  I  accept  your 
illustration  as  to  wheat.  You  say:  "As  a  question 
of  exchange  it  seems  to  me  to  be  essentially  the 
same  as  if  your  notes  and  bills  were  payable  in 
another  commodity,  say  wheat.  If  wheat  has 
gone  down  from  $i  to  50  cents  a  bushel  during 
the  life  of  your  paper,  the  makers  will  only  pay 


APPENDIX.  8 1 

half  as  much  to  take  it  up.  It  is  this  relation  of 
all  promises  to  pay  to  the  value  of  the  unit  in 
which  payment  is  to  be  juade,  which  seems  to  me 
to  make  it  fatally  erroneous  to  treat  these  promises 
to  pay  as  if  '  real  money.'  In  '  every  corner  '  of  a 
market  the  tremendous  nature  of  the  transaction 
and  its  consequences  is  determined  by  the  prices 
of  the  article,  though  there  may  be  very  few 
bushels  actually  in  the  elevators,  etc." 

Now,  in  my  following  illustration,  wheat  may 
be  regarded  as  gold,  and  corn  as  credit  substitutes 
for  gold.  Suppose  the  community,  as  you  suggest, 
made  its  notes  and  bills  payable  in  the  commodity 
wheat.  Suppose,  however,  that  through  a  new 
system  of  grinding  in  a  mill  called  a  bank,  corn 
was  made  equally  as  desirable  to  the  people  as  a 
medium  of  exchange  as  wheat  —  so  desirable  that, 
though  not  legally  bound  to  do  so,  they  would 
accept  payments  of  their  contracts  in  corn  as  readi- 
ly as  in  wheat,  knowing  that,  if  they  desired,  they 
could  turn  corn  into  wheat  "upon  demand  "  at  the 
same  mill.  It  is  evident,  I  think,  under  such  rela- 
tions, that  the  fluctuations  in  the  supply  of  corn 
in  existence  would  affect  the  price  of  wheat,  and 

6 


82  APPENDIX. 

that  it  would  be  the  total  amount  of  wheat  and 
corn  iri  existence  which  would  be  the  chief  factor 
in  determining  the  ease  or  difficulty  with  which 
contracts  payable  "  in  wheat  "  were  complied  with. 
No  business  man,  under  such  conditions,  would 
attempt  to  forecast  the  price  of  wheat  without 
fully  considering  the  situation  of  the  corn  supply. 
While,  as  you  suggest,  the  debasement  in  the  price 
of  wheat  from  f  i  to  50  cents  is  quite  a  benefit 
to  the  makers  of  contracts  payable  in  wheat,  yet 
that  debasement  could  occur  either  from  a  great 
increase  in  the  supply  of  wheat,  or  a  great  in- 
crease in  the  supply  of  corn,  or  a  great  increase  in 
the  supply  of  both  together. 

In  the  light  of  this  argument  I  will  qualify  the 
following  proposition  in  your  letter:  "  This  seems 
to  be  the  heart  and  soul  of  the  whole  theory  of  a 
standard.  If,  by  any  means,  natural  or  artificial, 
the  value  of  the  standard  is  changed,  you  affect 
in  the  same  ratio  the  value  of  all  outstanding  con- 
tracts to  pay  in  that  standard." 

My  qualification  is  that  where,  as  under  our 
present  system,  a  promise  to  pay  in  the  standard, 
called  a  check,  is  accepted  as  readily  as  the  stand- 


APPENDIX.  83 

ard  itself,  in  payment  of  another  promise  to  pay- 
called  a  promissory  note,  or  as  purchase  price  of 
a  commodity,  the  amount  of  checks  (or  substitutes 
for  the  standard)  have  more  of  an  effect  on  the 
value  of  the  standard  (since  they  are  more 
used  than  the  standard)  than  the  amount  of 
the  standard  has  upon  the  value  of  the  checks. 
And  as  regards  promissory  notes,  the  ease  or 
difficulty  with  which  they  are  paid,  or  rather  the 
amount  of  commodities  at  a  given  time  necessary 
to  pay  them,  is  determined  by  the  sum  of  the 
standard,  and  of  circulating  substitutes  for  the 
standard,  whether  these  substitutes  be  issued 
by  the  Government  or  through  the  operations  of 
banks. 


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